The Rise and Reform of China’s Unemployment Insurance System: Political Dynamics of Social Security System

Abstract

China introduced the nationwide unemployment insurance system (UIS) in 1986. The UIS is aimed at addressing the inevitable and growing unemployment problem resulting from market mechanisms under the reform and opening-up policy. However, it did not function properly to tackle unemployment problem as the central government had planned, with the unemployment and laid-off problem reached its peak in the late 1990s, while the UIS itself experienced several system changes.

How was the UIS conceived and constructed among central and local actors during the transition from a planned economy to a market economy? To explore the existing literature, which mainly focused on the late 1990s, this paper covers the initial period of the UIS and attempts to scrutinize the interactions between central and local-level actors. By comparing the two representative cases of Liaoning and Shanghai, this paper extracts the features and mechanism of the UIS construction process as well as the social security system in China.

The UIS, designed by the central government as a safety net to cover the fluid labor market under construction, was transformed into an enterprise-centered system during its implementation at the local level, as the local actors, including the local government, enterprises, and labor, failed to reach a consensus on the intention of the system design. Regarding the mechanism of this process, this paper argues that, firstly, the relationship and policy preference of local actors involved was still bound by the conventions of the planned economy period, such as the dependence of workers on the state-owned enterprises for livelihood security, and the allocation of labor and resources by the local government instead of the labor market. Secondly, the interest structure in the new UIS further strengthened those relationships and eventually led to an enterprise-centered system, which caused the inefficacy of both the security and market functions of the UIS. Thirdly, the interests regarding the new insurance system not only triggered conflicts between central departments but also led to a fragmented system at the local level, which was opposed to the central government’s intention of integrating social security system in this new policy area.

These political dynamics identified in both Liaoning and Shanghai suggest that, the interests relationship and interactions of local actors should be considered as essential factors that defined the restructuring of the social security system during the transition to a market economy in China.